We have reaffirmed our Neutral recommendation on
Regions Financial Corp.
(
RF
) based on its fundamentals, the recent sale of Morgan Keegan and
the repayment of the bailout money.
Fourth Quarter Results
Regions' fourth-quarter 2011 earnings from continuing operations
of 9 cents per share marginally surpassed the Zacks Consensus
Estimate. Results benefited from improved net interest margin and
better credit quality, backed by lower loan loss provisions and
reduced non-performing assets.
TARP Repayment and Morgan Keegan Sale
Only last week, Regions became one of the latest banks to repay
the bailout money it had taken from the government during the
latest financial crisis. The company repurchased $3.5 billion of
its Series A Preferred Stock, which was issued to the U.S.
Department of the Treasury as part of the company's participation
in the Troubled Asset Relief Program's (TARP).
Regions funded the repayment with proceeds from the recent $900
million common stock offering, in addition to the $1.2 billion
received on completing the sale of its securities brokerage arm,
Morgan Keegan & Company Inc. to
Raymond James Financial Inc.
(
RJF
) early last week. The company also used its other available funds
for the bailout repayment. Following the divestiture, Regions aims
to concentrate on its core banking business while providing
products and services to its clients in a better way.
The TARP loan repayment is essentially a positive for Regions.
On an annual basis, the repurchase of stock helps the company to
get rid of the dividend payment of $175 million on these
securities. Moreover, it removed the restrictions on both financial
and executives' pay package flexibility that the company was
subject to, upon being a TARP participant.
Going Forward
We believe Regions' favorable funding mix, improved core
business performance and its expansion mode will continue to yield
profitability in the upcoming quarters. Additionally, improved
credit quality and TARP repayment would act as positive
catalysts.
While the de-risking measures at Regions are encouraging, the
upfront costs of such initiatives cannot be avoided. Moreover, the
company still has significant exposure to risky assets.
Also, regulatory issues remain a major area of concern. The
financial reform law is expected to demand more stringent capital,
liquidity and leverage ratio, which will limit the company's
ability to pursue business opportunities by imposing additional
costs and restricting fees. Also, management anticipates
significant negative revenue impact from the Durbin Amendment in
2012.
Hence, the risk-reward profile for Regions seems balanced and
therefore, we have reiterated our Neutral recommendation on the
stock.
Regions currently retain a Zacks #2 Rank, which translates into
a short-term Buy rating.
REGIONS FINL CP (
RF
): Free Stock Analysis Report
RAYMOND JAS FIN (
RJF
): Free Stock Analysis Report
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